US bank lending snaps back in Q4'21

Commercial bank loan growth rebounded sharply in the 2021 fourth quarter, jumping well ahead of the pre-COVID-19 run rate, according to data from the Federal Reserve.

The figures support the optimistic guidance banks have offered in recent months that full pipelines would convert into actual borrowing and set the stage for a recovery toward pre-pandemic levels of net interest income.

Total loans across U.S. banks increased 2.8%, or $295.75 billion, from Sept. 29, 2021, to Dec. 29, 2021, according to the most recent seasonally adjusted weekly data. That equates to an annualized growth rate of about 11.8%, significantly higher than the 3.5% median quarterly annualized growth rate since the end of the Great Recession.

"The loan growth component has come even sooner than we thought," Christopher McGratty, head of U.S. bank research for Keefe Bruyette & Woods, said in an interview. In September 2021, KBW upgraded the bank sector to "overweight," citing signs of an inflection in loan growth, the prospect of higher interest rates and opportunity for banks to deploy large cash stockpiles into earning assets.

The economic recovery has driven an even stronger acceleration in lending than expected, Compass Point analyst David Rochester concurred in a Jan. 8 note. Large banks reported linked-quarter loan growth of 3.7% during the fourth quarter of 2021, without seasonal adjustment, which was stronger than any other fourth quarter "in the last 10 years by a wide margin," Rochester wrote.

The loan growth includes a 3.9%, or $93.92 billion, increase in seasonally adjusted commercial and industrial, or C&I, loans from Sept. 29, 2021, to Dec. 29, 2021, even as Paycheck Protection Program loans run off due to forgiveness. Lenders originated more than $790 billion of PPP loans, which were government-backed loans targeting small businesses.

By the end of the third quarter, banks still held $179.61 billion of outstanding PPP loans after a $145.46 billion linked-quarter decline driven by forgiveness. Analysts at Jefferies estimated in a Jan. 10 note that C&I loans at domestically chartered banks, without seasonal adjustment, would have grown 11.4% during the 2021 fourth quarter from the prior quarter without PPP forgiveness, instead of the reported 4.1%.

Economists expect the rapid spread of the omicron coronavirus variant could hamper economic growth and reverse some recent signs of improvement in supply chain disruptions, which bankers have cited as one of the factors inhibiting loan growth.

However, analysts said other fundamentals are moving in the right direction to support further increases in lending. In a Jan. 6 note, analysts at Raymond James said they anticipate that commercial line utilization will remain soft because low interest rates make borrowing in capital markets attractive, but that "should change when rates move higher."

Consumer borrowing also accelerated last quarter, with seasonally adjusted credit card balances growing 3.0%, or $23.19 billion, from Sept. 29, 2021, to Dec. 29, 2021.

Deposit inflows continued to be robust in the fourth quarter, with the Fed still injecting money into the economy through bond purchases that could conclude in March. Seasonally adjusted deposits increased 2.3%, or $397.66 billion, from Sept. 29, 2021, to Dec. 29, 2021, once again outstripping loan growth.

In a shift, banks appeared to deploy more excess liquidity in the 2021 fourth quarter, taking advantage of higher rates. Banks' seasonally adjusted holdings of securities increased 4.8%, or $260.81 billion, from Sept. 29 to Dec. 29. Meanwhile, seasonally adjusted cash holdings declined 1.1%, or $47.50 billion, over the same time period — the first decline in cash balances since the third quarter of 2020.

Continued liquidity deployment would further support the bullish case made by some analysts. While net interest margins will likely remain low by historical standards due to cash-heavy balance sheets, "returns can still be very strong next year as liquidity is put to work and as rates move higher, as loan growth materializes," McGratty said.